Impact Investing Conference

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Why Do ESG Funds Own Shares Of Facebook?  ForbesWhy Do ESG Funds Own Shares Of Facebook?  ForbesWhy Do ESG Funds Own Shares Of Facebook?  Forbes

Impact Investing Forum 2024

London. April 24-25, 2023.

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Facebook’s platforms were designed to make users angry and angrier in order to keep them engaged. They can increase suicide thoughts among teens and are used for sex trading.
These are just some of the conclusions from a recent series investigative reports by Wall Street Journal. They also revealed how the social media giant bent its rules for its most prominent users and allowed anti-vaccination misinformation proliferate.
Facebook has been using headlines like these for years. A New York Times investigation in 2019 revealed that Facebook Messenger allowed millions of images of child pornography to go uncontrolled.
Facebook was also fined $5Billion that year and ordered to reorganize its corporate structure. The Federal Trade Commission (FTC), for using deceptive practices to “undermine users privacy preferences,” had previously issued an order in 2012.
These reports raise a big question for ESG funds: Why does Facebook rank among your top holdings in ESG funds? Take the iShares ESG Aware Exchange-Traded Fund (ESGU), with more than $22 trillion in assets under management. It includes Facebook among its top five holdings, as does the Vanguard ESG U.S Stock fund (ESGV), which has more than $5 billion in assets.
If the Wall Street Journal reports about Facebook are true (their reporting has been backed up by internal Facebook documents), ESG funds may have to take a break. Socially conscious investors would not only be supporting a socially reckless company with their money, but they would also be paying premium annual fees.
Learn More About Sofi’s Safe WebsiteLearn more about Betterment’s WebsiteLearn more about WealthFront’s secure websiteESG Theory vs. Practice: Environmental, Social Governance
Buzzy investing acronyms are a regular occurrence on Wall Street. ESG investing, which stands for environmental social and governance, is one of the most popular. ESG investing, which is a way to direct investors’ funds to companies that have positive outcomes in these three areas, sounds good in theory.
ESG is a strategy to avoid risk. MSCI, a market data firm that creates many of ESG-powered market indexes, uses a series questions and data points to measure a company’s ability to resist long-term, industry-material environmental, social, and governance risks.
MSCI examines how a company makes its money. A bank has different risks than a confectionery maker, and determines how vulnerable it is to various environmental and governance factors that could threaten future profits. Companies that score well on MSCI’s ESG tests have lower risks to their revenue and profitability–making them better investments, and, in theory, more ethical ones.
Mark Gorzycki (market sentiment analyst and co-founder of OVTLYR stock analytics tool), said that it’s all about the messaging and the narrative surrounding the companies selling these products. “There is a flawed system to determine what is ESG.”
MSCI competitor FTSE Russell maintains a similar ESG rating business, while Morningstar, a market research firm, rates companies based upon a sustainability rating. One globe means a lot of risk, five globes mean a lot less.
The investing public has an almost unquenchable desire for ESG funds. According to Morningstar data, U.S. ESG fund assets had increased to more than $300 billion by the second quarter 2021, compared with just $100 billion three years ago. According to a Morningstar study, 72% of investors are least interested in ESG investing. 44% are very or somewhat interested.
Are investors investing in ESG funds to help mitigate investment risks or because they want to make a difference? Many believe it’s the latter. Almost 9-in-10 consumers think companies should be pursuing ESG practices, according to a PricewaterhouseCoopers survey, while 86% of employees want to work for a company that shares the same values as they do.
It doesn’t matter if the label is ESG, sustainability, or another, it has a halo effect. It shouldn’t surprise that some individual or institutional investors feel the same way shoppers and workers do.
Are companies living up to the ESG hype
Public companies that do the right thing when it comes to reducing climate change and improving human rights are in high demand. Investors want to achieve their financial goals. ESG advocates argue that these two goals are not mutually exclusive. They argue that having a higher ESG rating can result in better performance on both sides.
John Hale, Head of Sustainability Research at Morningstar, stated that these are investments first. “An ESG fund still has to deliver that return.”
What happens if a company does not do the right thing but still scores well on ESG measures. What if this company engages in business practices that are contrary to ESG principles?
How can a company like Facebook target minors when its own research shows that it leads some teenage girls suicide? What does ESG mean if Facebook is owned by ESG fund? Isn’t this just a very effective marketing tactic? These questions were not answered by MSCI.
This phenomenon goes well beyond Facebook. ESG funds also own Apple, another company. If you don’t believe Facebook should be included in an ESG fund can you support the inclusion of a company whose main manufacturer, Foxconn made its Chinese employees suffer such miserable working conditions that some even committed suicide?
Apple highlights the problems in ESG theory and practice. Apple was not only guilty of ESG principles, but it also had no investing downside. Apple has achieved 27% annual returns in the past decade, which is remarkable considering its size. Morningstar has four globes, despite past problems.
Should You Invest In ESG Funds
Hale said that there is no industry consensus on what constitutes a good or poor ESG investment. These things are viewed as a continuum by most people. It all depends on how you view it.
Most investors don’t have the time or the inclination to ponder on ESG’s Platonic ideals.
This is great news for ESG fund managers, as they are taking in billions in assets and fees. ESG funds charge higher fees than those that track broad market indexes. They are also less likely to yield higher returns.
ESG investors today are willing to pay more money to get a label that doesn’t mean what they think it does. Here are some steps to help you choose ESG funds that will actually do what they promise.
* Find out what ESG means to you. Before you invest in ESG, think about what you are hoping to achieve. What are you willing and able to accept? There is no perfect company. All of them fail to pass environmental, social, or governance tests at some point. Will you still want one of them in your portfolio if it fails? You will be able to make better decisions once you know what you are looking for and what imperfections you can bear.
* Do your own ESG research. Your definition of an ESG investment is likely to be different from that of mainstream funds. Look at the top holdings of any ETF from Vanguard, iShares, and determine if they align with your principles. Morningstar’s sustainability tool can provide additional assistance. An ESG risk rating will be displayed, along with a list of the top three issues and a controversy level indicator. Although no one expects you become a chartered financial analyst or chartered accountant, it is a good idea to have a basic understanding of the ESG rating process before you choose a fund.
* Pay attention to fees. Fees are one of the greatest obstacles to investors achieving their financial goals. Passive investing was a powerful revolution because it simply mirrored the market at the lowest cost. Investors were able to achieve better returns than professional active managers. ESG funds, even though they follow an index, are a form active management and therefore charge higher fees. Vanguard ESG U.S. stock fund has a 0.12% expense ratio, compared with just 0.03% for Vanguard S&P500 (VOO).
Money managers are always looking for ways to increase their funds’ liquidity. ESG has proven to work well. It’s time to ask hard questions before you become another member of the herd.

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ESG Investing Conference